Talanx Primary Insurance Group

Transcription

1 Primary Credit Analyst: Jean Paul Huby Klein, Frankfurt (49) ; Secondary Contact: Johannes Bender, Frankfurt (49) ; Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Support Accounting Considerations Related Criteria And Research SEPTEMBER 3,

2 SACP* Assessments SACP* Support Ratings Anchor a+ Business Risk Strong + Modifiers 0 ERM and Management 0 = a+ Liquidity Group Support 0 = Holding Company Rating Financial Risk Very Strong Holistic Analysis 0 Sovereign Risk 0 Gov't Support 0 A-/Stable/-- *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Strong Solid market positions in industrial lines, as well as in key markets within its retail business like Germany, Poland, and Brazil. Increasing business and geographic diversification. Significant challenges in the German retail segment, in particular in the life business. Intermediate industry and country risk, reflecting our view of exposures in German and international retail and international industrial business. Financial Risk Profile: Very Strong Very strong capital adequacy, based on our assumption of capital at least in the 'AA' range over Following our review of Talanx Primary Insurance Group's (TPG) economic capital model, we factor in quantitative credit in our overall assessment of the group's very strong capital adequacy. Sound earnings from the group's retail international segment and stabilizing industrial business, partly offset by weak earnings from German life business and above market average cost ratios in German retail property/casualty (p/c) business. Moderate investment and diversified underwriting risks. Proven access to capital markets and healthy financial leverage and fixed charge coverage. SEPTEMBER 3,

3 Other Factors We view TPG's enterprise risk management as strong. Its management and governance is satisfactory, in our opinion. TPG has exceptional liquidity owing to its highly liquid asset portfolio. We implement a segmented approach when rating the core operating entities of TPG and those of reinsurance subsidiary Hannover Rueck SE (Hannover Re, AA-/Stable/--), although we view Hannover Re as core within the Talanx group. The ratings reflect our view of the group's strong business risk profile and very strong financial risk profile, built on a strong competitive position and very strong capital and earnings. These factors lead to an anchor of 'a' or 'a+' for TPG. We have assigned the 'a+' anchor to TPG, given our view of its favorable competitive position compared with peers, solid capital base, and stringent enterprise risk management approach. Factors Specific to the Holding Company The rating on holding company Talanx AG is two notches below that on the group's core operating entities, reflecting its position as the majority intermediate management holding company of TPG, as well as its 50.2% stake in Hannover Re. Outlook: Stable The stable outlook on Germany-based TPG reflects Standard & Poor's Ratings Services' expectation that the group will maintain its strong business risk profile over our forecast horizon. We base our view on its strong competitive position in the three segments in which it operates and its intermediate industry and country risk. We also consider that TPG will maintain very strong capital and earnings and an intermediate risk position. Downside scenario We would consider taking a negative rating action on TPG if its capital and earnings sustainably weakened to lower than very strong levels. This could occur if we observed higher risk capital charges or markedly lower earnings than we currently anticipate in our base-case scenario. Upside scenario We view a positive rating action as a remote possibility in view of the challenges in the group's German retail business, in particular life. Base-Case Scenario SEPTEMBER 3,

4 Macroeconomic Assumptions German government yields will likely moderately increase over the next two to three years, but remain below long-term historical norms until at least For more detailed economic assumptions, please see "Credit Conditions: Despite The Turmoil In Greece, Europe's Fragile Growth Continues," published July 14, 2015, on RatingsDirect. Company-Specific Assumptions Annual growth in gross premiums written (GPW) will likely average between 3% and 5% in , mainly on the back of retail international and industrial business lines. We expect annual net profits of 650 million to 800 million in results could be on the lower end of the forecast range, based on goodwill impairment on the German life business of 155 million, partly offset by increasing technical profitability in the international retail and industry business. We forecast a non-life combined ratio of 96%-98% in Capital adequacy should remain at least in the 'AA' range, in our opinion. Key Metrics 2016F 2015F Gross premiums written (mil. ) >14,500 >14,000 14,215 13,817 12,408 Net income (mil. ) Return on shareholders equity (%) 07-Oct 07-Sep P/C net combined ratio (%) Net investment yield (%) S&P capital adequacy at least very strong at least very strong Very strong Very strong extremely strong Fixed-charge coverage Financial leverage (%) <20 < *All figures are for Talanx Primary Insurance Group, unless stated otherwise. Figures for Talanx Consolidated Group. P/C--Property/casualty. F--Standard & Poor's forecast. Company Description Talanx AG is the intermediate management holding company of the Germany-based Talanx Group, which includes TPG and Hannover Re. Talanx Group is the third-largest insurance group in Germany when including the reinsurance business, with 29.0 billion in GPW at year-end TPG reported GPW of 14.2 billion, deriving 41% from life insurance activities and 59% from p/c business. TPG is an active acquirer of companies, as its recent purchase of the Chilean company Inversiones Magallanes and the former acquisitions of the Polish companies Towarzystwo Ubezpieczen i Reasekuracji WARTA S.A. () and TU Europa S.A. (not rated) demonstrate. The group's structure favors a customer-based focus over a business-line approach. The group operates across the following segments: Industrial Lines, Retail Germany, Retail International, Non-Life Reinsurance, Life and Health Reinsurance, and Corporate Operations. The group's primary insurance business--tpg--operates in the first three segments. SEPTEMBER 3,

5 Business Risk Profile: Strong We regard TPG's business risk profile as strong, reflecting the group's strong competitive position and intermediate industry and country risk. Insurance industry and country risk: Intermediate, based on exposure to a variety of industry and country risks TPG faces intermediate industry and country risk, in our opinion. The group is mainly exposed to German p/c and life business but has grown significantly in nondomestic markets in recent years. Its largest markets outside Germany include Poland, Italy, Brazil, the Netherlands, and Austria. Within its dominant domestic market, we believe TPG faces intermediate risk in life insurance and low risk in non-life insurance. Low interest rates continue to squeeze margins on the traditional life insurance portfolio and increase asset-liability management (ALM) risks, particularly at TPG's core subsidiary HDI Lebensversicherung AG (HLV). We also factor in our more favorable view of the German p/c sector, which we consider to be low risk. We regard the group's international, industrial p/c lines as intermediate risk because of their higher product risk. Table 1 Talanx Primary Insurance Group Industry And Country Risk Insurance sector IICRA Business mix (%) Germany Life 3 37% International Industrial Insurance 3 28% Germany P&C 2 10% Brazil P&C 3 5% Italy Life 4 5% Poland Life 4 4% Poland P&C 4 3% Turkey P&C 4 1% Mexico P&C 4 1% Italy P&C 4 1% Hungary Life N.A. 1% Netherlands P&C 2 1% France P&C 2 1% Other 3 1% Weighted IICRA % * Figures are for Talanx Primary Insurance Group. Competitive position: Strong, because of scale and diversity TPG's competitive position benefits from strong market positions, in particular via its strong position in industrial business, retail Germany, retail Poland, and Brazil. We also view positively the group's diversification in terms of business lines and distribution channels. TPG has taken further meaningful steps to strengthen its international diversification in its target growth regions of Central and Eastern Europe and Latin America. Still, we think that, with the exception of Poland, the competitive strength of TPG's nondomestic operations lags behind that of the domestic operations. SEPTEMBER 3,

6 In industrial lines, we believe TPG benefits from a leading position in the European industrial line business, with global industrial business accounting for 28% of total GPW. TPG has business relationships with most multinational groups in Europe, with a high proportion of leading and exclusive mandates. We expect TPG will maintain its market leading position and produce some growth momentum in this segment, which underpins our projected annual growth of 3%-5% in TPG's GPW. In German retail, representing about 42% of total GPW in 2014, TPG operates under the HDI brand to distribute life and non-life products. TPG also has partly exclusive distribution agreements in place with banks to sell life products. These are TARGOBANK, Deutsche Postbank AG, and about 100 members of the widespread network of German savings banks ("Sparkassen"). While the bancassurance approach has provided TPG with strong and sustainable growth and earnings, the non-bancassurance business is experiencing pressure on new business growth, carries relatively high costs, and posts generally weaker earnings. Management has taken action, announcing a wide realignment of the German life business for Talanx decided to separate the management responsibilities of the life and non-life business lines to reduce management complexity, sharpen the operational focus in the business lines, and also prepare for future Solvency II requirements. In this context, the group also decided to significantly adjust its balance sheet and product landscape in the life segment, to be able to better cope with the current economic challenges. The group decided to replace the new business of traditional products that have interest rate guarantees by capital-efficient products. The aim is to focus on biometric risks as well as on a new product that lowers capital consumption by 50%, expecting higher returns for policyholders and shareholders. We believe that these steps will likely not foster growth in the short term and consequently we expect GPW in the segment to decrease or stagnate over Retail international, contributing about 30% of total GPW in 2014, continues to display strong growth momentum, partly driven by some acquisitions in recent years. In 2015, the group took over the Chilean insurance group Inversiones Magallanes which is one of the leading composite insurers in Chile. After the acquisition, TPG expects an impact of 280 million GWP and about 10 million EBIT for the entire Chilean operations. TPG's market position within the segment, with exception of Poland, is generally smaller but also has growth potential. We expect this segment to provide TPG with further growth potential. Excluding any further potential acquisitions, we expect the group to report average GPW growth rates in the range of 4%-9% over in this segment. Table 2 Talanx Primary Insurance Group Competitive Position* --Year ended Dec (Mil. ) Gross premiums written 14,215 13,817 12,408 11,194 10,976 Change in gross premiums written (%) Net premiums written 11,713 11,055 9,854 8,806 8,696 Change in net premiums written (%) Total assets under management 77,751 69,778 67,057 58,137 57,576 Growth in assets under management (%) Reinsurance utilization (%) SEPTEMBER 3,

7 Table 2 Talanx Primary Insurance Group Competitive Position* (cont.) Business Segment (% of GPW) Life P/C Health Consolidation - - (0.4) (0.2) (0.2) *All figures are for Talanx Primary Insurance Group, unless stated otherwise. Financial Risk Profile: Very Strong We view TPG's financial risk profile as very strong, reflecting very strong capital and earnings, an intermediate risk position, and strong financial flexibility. Capital and earnings: Very strong capital adequacy We view TPG's capital and earnings as very strong, based on our forecast of the group maintaining capital adequacy at least at the 'AA' level over , under our capital model. Having reviewed TPG's economic capital model, we also factor quantitative credit into our overall assessment of the group's very strong capital adequacy. In terms of capital generation, we forecast TPG will maintain sound net profits in the range of 650 million to 800 million annually, of which we assume it will distribute up to 45% as dividends. We expect 2015 results to be in the lower end of our scale, as the company's goodwill impairments on its German life operations amounted to 155 million in the first half of Under our forecast, we assume p/c underwriting profitability will improve over based on our anticipation that natural catastrophe claims in Germany will remain at normal levels. We therefore expect a net combined ratio, the industry's key profitability metric, in the range of 96%-98% over We also assume continued pressure on investment returns, reflecting an only slight increase in interest rates over our forecast horizon. In life, we think earnings will continue to be pressured in view of additional reserving requirements and against a backdrop of stable net investment yields in at best. We expect growth in the 3%-5% bracket in liability exposures in life and p/c. In terms of asset risk exposures, we assume some exposure growth but no material change in the relative composition of asset risks over our projection period. Table 3 Talanx Primary Insurance Group Capital* --Year ended Dec (Mil. ) Common equity 8,483 7,982 8,320 5,925 5,426 Change in common equity (%) 6.3 (4.1) Total capital (reported) 10,318 9,613 9,853 7,568 7,107 Change in total capital (reported) (%) 7.3 (2.4) *All figures are for Talanx Primary Insurance Group, unless stated otherwise. SEPTEMBER 3,

8 Table 4 Talanx Primary Insurance Group Earnings * --Year ended Dec (Mil. ) Total revenues 14,623 13,885 12,619 11,520 11,434 EBIT (reported) 937 1, Net income Return on total capital (%) Return on shareholders' equity (reported) (%) P/C: Net expense ratio (%) P/C: Net loss ratio (%) P/C: Net combined ratio (%) Life: new business margin (%) Operating earnings by segment Industrial lines Retail Germany Retail International *All figures are for Talanx Primary Insurance Group, unless stated otherwise. Risk position: Intermediate, based on moderate risk investments and diversified underwriting risks In our view, TPG's risk position reflects intermediate risks, benefiting from the diversity of its investment and insurance risks. TPG's asset allocation is heavily geared toward fixed-income investments, with minor equity investments and some exposures to property and alternative investments. Credit risk is limited, with an average rating of 'A' at year-end TPG's fixed-income portfolio continues to be rather concentrated on financial services exposures, partly driven by covered bond investments. Table 5 Talanx Primary Insurance Group Risk Position* --Year ended Dec (Mil. ) Total invested assets (including unit-linked assets) 77,751 69,778 67,057 58,137 57,576 Change in invested assets (%) General account invested assets 68,325 61,453 59,607 52,069 51,162 Separate accounts/unit linked assets 9,426 8,325 7,451 6,067 6,414 Net investment income 2,490 2,442 2,401 2,183 2,154 Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including all gains/(losses) (%)* General account invested assets (%) Real estate Investments in affiliates SEPTEMBER 3,

9 Table 5 Talanx Primary Insurance Group Risk Position* (cont.) Common stock Financial instruments, loans and receivables Cash and short-term investments Other investments *Including appreciation and impairments. Financial flexibility: Strong, based on healthy financial leverage and coverage ratios We view Talanx Group's financial flexibility as strong and consider that TPG benefits from this strength. The group has demonstrated access to capital markets through equity and debt issues and we expect this to continue. The financial flexibility is in our view further supported by the fact that TPG's parent HDI Haftpflichtverband der Deutschen Industrie VaG retains 79% of the group's dividends, which we view as an additional capital and liquidity source for TPG. At year-end 2014, the group's financial leverage ratio (debt plus hybrids to economic capital) was approximately 17% and fixed charge coverage stood at 6x. Based on our capital and earnings forecast and assuming no major change in the group's capital management approach, we expect financial leverage to remain below 20%, with fixed charge coverage ratios of 4x-6x. Table 6 Talanx Primary Insurance Group Financial Flexibility* --Year ended Dec Fixed-charge coverage (x) Financial leverage (%) *Figures for Talanx Consolidated Group. Other Assessments Enterprise risk management: Strong We regard TPG's ERM as strong following the recent steps toward a harmonized framework at Talanx Group level. We think TPG is unlikely to experience losses that are in excess of its risk tolerance. ERM is of high importance to the rating on TPG, which operates in complex and potentially volatile business lines, while being highly exposed to the competitive German insurance market. The major factors supporting our ERM assessment are our positive views on risk management culture, risk controls for the main risks, risk models, and strategic risk management. Talanx Group has developed a groupwide strategic risk management framework with increasingly centralized risk management responsibilities. This is supported by a holistic, and consistent economic capital model--"term"--that the group has deployed to support the risk budgeting allocation process, the limit and threshold system, and business planning through a value-based management approach. We assess risk management culture as positive, supported by the enlarged competencies under the chief risk officer SEPTEMBER 3,

10 and overall larger risk management resources, including a group risk management team and a clear risk management structure between group risk management and local operating entity level. A consistent groupwide risk-management framework is in place. In line with the group strategy, Talanx Group has clearly defined its overall risk appetite and risk tolerances at group and operating entity levels. For the most significant risks, Talanx Group has implemented central management and control through its group risk-management team, and we believe that the sound limit and threshold system will support a consistent risk approach across all local operating entities. We assess strategic risk management as positive. The development of a group model has strengthened the strategic use of risk capital considerations in Talanx Group's value-based management and performance measurement approach. The group also demonstrates a groupwide consistent risk tolerance framework based on an optimized risk budgeting process. Management and governance: Satisfactory TPG's management and governance is satisfactory, in our opinion. The group has a track record of thorough strategic planning, strong management expertise, and conservative and sophisticated financial management. The group has made significant progress in demonstrating the success and effectiveness of its more recent accelerated international retail expansion, but has yet to establish a sustainable turnaround of parts of its German retail business. Liquidity: Exceptional TPG's liquidity benefits from the strength of its diverse liquidity sources, mainly premium income, and an asset portfolio that contains about 57 billion in liquid assets after our internal stress. There are no refinancing concerns, and we believe the group capable of managing unexpectedly large claims or an increase in life insurance policy lapses. Support Group support Within the Talanx Group, we take a segmented rating approach toward the primary insurance operations (TPG) and reinsurance (Hannover Re) operations. We regard both entities as core within the Talanx Group. Despite its operational independence, Hannover Re is, in our view, core to the group because of its strategic role and size. The ratings on Hannover Re are therefore underpinned by the financial strength of the core primary insurance entities of the Talanx Group. The combination of Hannover Re's core status and its relative operating independence means that, under our current rating methodology, the ratings on Hannover Re will not fall below those on the core operating entities of the Talanx Group and could remain up to two notches higher. Accounting Considerations We mainly base our assessment of TPG on its annual financial statements, where we focus on the three primary insurance segments: Retail Germany, Retail International, and Industrial Lines, supplemented by non-public information on the life and p/c segments and a consolidated view on TPG. Our assessment of financial flexibility relies on consolidated group figures rather than on TPG data only. In our ratings on domestic and non-domestic subsidiaries of the group, our analysis is based on annual reports under local generally accepted accounting practices and SEPTEMBER 3,

11 International Financial Reporting Standards. In assessing TPG's capital adequacy we adjust reported shareholder's equity to account for: 50% of life insurance value-in-force not included in the balance sheet, Parts of the policyholder capital available to absorb losses, Hybrid debt classified as equity according to our criteria, 25% of loss reserve surplus, and Off balance sheet asset value reserves other than life bonds. We also give credit for TPG's economic capital model in our assessment of capital adequacy and deduct on-balance-sheet goodwill from capital. Related Criteria And Research Insurers: Rating Methodology, May 7, 2013 Group Rating Methodology, Nov. 19, 2013 Enterprise Risk Management, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Use Of CreditWatch And Outlooks, Sept 14, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Ratings Detail (As Of September 3, 2015) Holding Company: Talanx AG Junior Subordinated Senior Unsecured A- Operating Companies Covered By This Report HDI Haftpflichtverband der Deutschen Industrie VaG Counterparty Credit Rating HDI-Gerling America Insurance Co. HDI-Gerling Industrie Versicherung AG A-/Stable/-- BBB SEPTEMBER 3,

12 Ratings Detail (As Of September 3, 2015) (cont.) HDI-Gerling Welt Service AG HDI Lebensversicherung AG HDI Versicherung AG Neue Leben Lebensversicherung AG PB Lebensversicherung AG TARGO Lebensversicherung AG Towarzystwo Ubezpieczen i Reasekuracji WARTA S.A. Domicile A/Stable/-- A/Stable/-- Germany *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com SEPTEMBER 3,

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